In 2022, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) targeted DeFi crypto mixer Tornado Cash with sanctions, claiming the platform had laundered over $7 billion. At that time, The Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson, claimed:
“Today, Treasury is sanctioning Tornado Cash, a virtual currency mixer that launders the proceeds of cybercrimes, including those committed against victims in the United States. Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks. Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them.”
Reports of arrests and the shuttering of the platform soon followed.
Mixers can be used for nefarious activities but can also be used for privacy concerns – especially in parts of the world with fewer rights than in the US. Individuals created Tornado Cash, but no one operated it. The service was available to anyone who wanted to use these smart contracts as it is a “fully decentralized protocol for private transactions on Ethereum.” So, the case against Tornado Cash was not that cut and dry.
Questions arose about how a government agency could sanction code and whether this was a freedom of speech issue.
A Ledger executive stated after the sanctions were revealed:
“Ultimately, there is no freedom without privacy and there can be no democracy without free speech. Privacy and free speech are the bedrock of free and open societies. Make no mistake – THIS is what Treasury sanctioned this week.”
Yesterday, this was all reversed as a federal court ruled that Treasury over-stepped its remit and exceeded OFAC’s statutory authority.
The Fifth Circuit court’s decision explains:
“Contrary to the Department’s arguments, the immutable smart contracts are not services. So even when we consider OFAC’s regulatory definitions, the immutable smart contracts are not property because they are not ownable, not contracts, and not services.”
And;
“Our Constitution’s ingenious design demands that judges be sticklers when it comes to decoding legislative text.”77 Because these immutable smart contracts are not “property” under the word’s common, ordinary meaning or under OFAC definitions, we hold that OFAC exceeded its statutory authority. Accordingly, we need not address whether Tornado Cash qualifies as an “entity” or whether it has an “interest” in the immutable smart contracts.”
The court acknowledged that there are “real-world downsides” but stated “interpretation is divining what the law is, not what the judge-interpreter wishes it to be.”
Coinbase Chief Legal Officer Paul Grewal took to X to celebrate that victory, calling it a “historic win for crypto and all who care about defending liberty.” Coinbase helped to lead the charge to get the OFAC’s sanctions over-turned.
